Our picks for the top junior oil companies of the past, present and future
BY JODY CHUDLEY
Fifteen years ago it was common knowledge that oil and gas production in North America was in terminal decline. After decades of exploration, all of the profitable onshore oil and gas in Canada and the U.S. had already been discovered.
As a result, the majors set their sights elsewhere in search of reserves that could move the needle for them. The big boys of the business looked to riskier locales like Africa and Kurdistan as places where large amounts of hydrocarbons could still be discovered. Other areas of attention for the majors were far offshore in the deep ocean or way up north in the Arctic.
While the attention of the majors was elsewhere, close to home something happened. Small companies run by entrepreneurial management teams cracked the code on vast amounts of oil and gas located here in North America. These management teams didn’t really have any options—they didn’t have the deep pockets to chase elephants elsewhere.
Through trial and error, and with some help from higher oil and gas prices, it was a group of independent producers who figured out how to economically extract energy from poor quality rocks. Drilling horizontally allowed companies to stay in contact with oil and gas formations over longer distances. Fracking these formations opened up those rocks and kept them propped open to allow for oil and gas to flow.
The corporate caretaker mentality of the majors wasn’t attuned to this new age of oil and gas production. It was, instead, the entrepreneurial mindset of the small, independent operators.
Celtic CEO David Wilson
In 2002, David Wilson formed Celtic Exploration with a couple million dollars and a plan to get big. Really big.
What Wilson wanted to do was build a company with as many opportunities inside it as he could, so that it would eventually be attractive to a larger suitor. Then, once opportunity knocked, Wilson wanted to cash out. That’s exactly what he did when ExxonMobil came calling in 2012 and offered $3.1 billion for Celtic.
Inside Celtic, Wilson assembled a huge portfolio of resource play prospects well before it was even clear the plays would produce. He stayed away from bringing in joint venture partners in order to keep the company clean for an acquirer.
When it was acquired, Celtic was producing 22,000 boe/d, 75 percent of which was natural gas. The real attraction for Exxon was the whopping 545,000 acres of Montney shale and 104,000 acres of Duvernay that Celtic controlled. Celtic shareholders cashed out with 50 times their initial investment.
So how did Celtic manage to get such a massive land position in the Montney and Duvernay? The answer is pretty simple. The company took a chance and moved aggressively before larger companies had any interest. As with most entrepreneurs, Wilson and his team didn’t bask in Celtic’s success for long. Simultaneous with the sale to Exxon, a new company called Kelt Exploration was spun out with Wilson as CEO.
With roughly 22,000 boe/d, Kelt is of a similar size today as Celtic was when it was sold to Exxon. The company has four different core areas of operation in northeast British Columbia and northwest Alberta, with a focus on the Montney and Doig formations. Directors and management own 18 percent of Kelt’s outstanding shares and are now trying to steer the company through this trough in the commodity cycle.
Crescent Point Energy
Crescent Point CEO Scott Saxberg
Investors know Crescent Point Energy as a significant oil producer. The company has a market capitalization of more than $10 billion, 165,000 boe/d of production and almost a billion barrels of proved and probable oil reserves. That is a big company.
Considering how large Crescent Point is today, it’s hard to believe that it didn’t even exist at the turn of the century—yet another story of an entrepreneurial management team building something out of nothing. Crescent Point’s CEO Scott Saxberg was an engineer for junior producer Wascana Energy when the 21st century rolled around. In 2001, Saxberg joined a leadership group that was ready to strike out on its own.
The name Crescent Point came from the road to Saxberg’s family cottage. The business strategy of focusing on oil was a contrarian one at a time when the majors were snatching up gas-weighted assets, believing a shortage was coming. Boy, were they wrong. As the major producers bought companies for their gas assets, they dumped the oil properties. That meant opportunity for Saxberg and his crew.
Embracing the horizontal drilling revolution and moving quickly into emerging unconventional plays like the Saskatchewan Bakken, Saxberg created an acquisition-focused business model for Crescent Point. By keeping a very conservative balance sheet, aggressive hedging and significant dividend, Crescent Point became very attractive to investors, and as a result has historically had a premium market valuation.
Keeping a top quality balance sheet didn’t just allow Crescent Point to build a sizeable business. It has also allowed the company to weather an oil price collapse that very few thought could last this long. While other higher decline unconventional producers have disappeared, Crescent Point has been able to cut its dividend and hunker down.
Today, Saxberg and Crescent Point have a huge portfolio of light oil drilling locations across the Bakken, Shaunovan, Unita and Viking plays. The next act for Saxberg, once oil prices recover, is likely to be secondary recovery through water-flooding, which can increase recoveries by 200 to 300 percent.
Bonterra CEO George Fink
George Fink doesn’t make a lot of noise. He’s too busy building his company the right way. Since he rarely requires funding from the capital markets, Fink doesn’t need to be promotional in order to drum up investor interest.
One of the beautiful things about investing alongside entrepreneurial management teams is that they usually own a significant number of shares in the company. That is the case with Fink and, as a result, he protects Bonterra Energy’s share count and capital like the precious commodities they are. After all these years, Bonterra still only has 33 million shares outstanding. The initial public offering for Bonterra was done at $0.20 per share. Since then, shares have been as high as $60, and that doesn’t even factor in the $30-plus of dividends the company has paid.
Nearly two decades ago, Fink had a vision that someday technology would unlock a whole lot more of the oil and gas that is trapped in the ground. That led him to accumulate a significant amount of land in the Alberta Cardium before it had significant value to anyone else. He was right of course. Land that he paid pennies for is now worth big dollars for Bonterra.
Like many great businessmen, Fink is a contrarian by nature. When others are selling, he is buying.
In 2015, Fink had Bonterra in the financial position to be an acquirer while others needed to sell. The company picked up a very complementary piece of the Cardium from Enerplus for $172 million. Had he known that oil would still be so low, Fink likely would have waited. The key point to note is that his management ability had built the company to be in a position of strength when others needed to sell.
Today, Bonterra is producing just under 13,000 boe/d, and is still paying a dividend, albeit a reduced one. With 773 net drilling locations remaining in the Cardium, the company has years of dividend paying left in front of it.
Peyto Exploration And Development
Peyto CEO Darren Gee
Over the past five years, the last commodity that you would want to be a producer of in North America was natural gas. The flood of natural gas from shale wells has resulted in prices so low that drilling natural gas wells has been an excellent way to destroy shareholder value for almost every company. Apparently, Darren Gee and his colleagues at Peyto Exploration didn’t get the memo.
Since 2010, while natural gas producers have floundered, Peyto has grown its production fivefold from 20,000 boe/d to more than 100,000 boe/d. More importantly, it has done so profitably. While every oil and gas producer aims to be the lowest cost, most profitable producer in the business, Peyto actually achieves it. From 1998 through the end of 2015, Peyto wasn’t just the best performing energy stock on the TSX, it was the best performing stock, period.
Gee and Peyto have resisted the urge to chase opportunities in different plays and have instead stayed focus on the tremendous assets the company has. Peyto’s assets are in the best part of the Deep Basin. On each section of land, Peyto has up to 80 billion cubic feet of resource through stacked formations (Wilrich, Fahler, Notikewin, Cardium, Bluesky). By using horizontal drilling and pad efficiencies, Peyto can get a lot of gas out on less invested capital. The result is incredible economics.
Peyto has only 51 employees and controls all of its own infrastructure. The combination of these factors allows Peyto to generate a positive investment return drilling wells at lower natural gas prices than its competitors. In fact, low natural gas prices help Peyto in that they lower service costs. At higher gas prices, Peyto can mint money. That makes it hard for this company to lose.
Vermilion Chair Lorenzo Donadeo
Vermilion is the Canadian producer with an international advantage. While oil and gas producers struggle with depressed North American natural gas prices, Vermilion enjoys much better pricing with its global production. Being diversified internationally is unique for a Canadian independent.
Vermilion’s operating areas look more like list of countries participating in the Olympics than they do a list of assets belonging to an oil and gas explorer that’s not in the major league. Vermilion has operations in Canada, the U.S., France, Germany, Ireland, Australia and the Netherlands.
Those international operations have allowed Vermilion to continue to pay its dividend through this oil collapse while also maintaining a solid balance sheet. With natural gas prices well over $6 per Mbtu, Vermilion’s European production has been earning three times what North American gas has in 2016. Vermilion continues to maintain a sizeable amount of Canadian-based production with 25,000 boe/d, but international production is its lion’s share.
Vermilion, which was launched back in 1994, is one of the older independent producers still operating. The company listed for $0.10 per share on the Alberta stock exchange in the spring of 1996 and joined the TSX later that year. What drove Vermilion to Europe in the first place was a belief that asset prices in the mid-90s in Western Canada were too high. It was a quick change in strategy that only an entrepreneurial young company could make.
Two of Vermilion’s three initial co-founders are still on its board, with Lorenzo Donadeo acting as chairman and Claudio Ghersinich acting as a director. Vermilion’s diversified asset base may make it less appealing to larger suitors as an acquisition candidate, but that should suit long-time shareholders just fine as they should continue to receive a reliable and growing dividend stream for years to come.
Canadian Natural Resources Ltd.
CNRL Chair Murray Edwards
Murray Edwards was not born with a silver spoon in his mouth. As the son of an accountant and a school teacher in Regina, he started his journey towards becoming a billionaire armed with a commerce degree from the University of Saskatchewan and a law degree from the University of Toronto.
The early days of Canadian Natural Resources (CNRL) in 1989 involved a company operating with nine employees, just over a 1,000 b/d of production and a market capitalization of just $1 million.
Edwards grew CNRL steadily through the 1990s. A huge turning point in the company’s history was the $1.6-billion acquisition of BP Amoco’s Canadian business arm. That deal gave birth to CNRL’s domestic oil business, which higher oil prices soon lifted. Today, CNRL has an incredible 850,000 b/d of production, nine billion barrels of proved and probable reserves and employs more than 6,600 people.
The company is also very well positioned to keep growing through these low commodity prices. From 2017 through 2019, CNRL is esti-mating that, at an average oil price of $60 for WTI, the company will generate nearly $9 billion in free cash flow.
That’s excess cash flow after all capital spending. That cash can be directed towards dividends, share repurchases, debt reduction or whatever opportunities should happen to pop up. More impressive is that CNRL can do all that while growing production at a rate of eight percent per year. That is unique in this world, where shale focused producers struggle to maintain production while living within their cash flows. And, if oil prices soon head higher, all the better.
Tourmaline CEO Mike Rose
If you had $100 million and had to give it to one oil and gas man to try and turn it into something bigger, Mike Rose may be your best bet. Prior to founding Tourmaline Oil in 2008, Rose successfully built and sold Berkeley Petroleum to Anadarko Petroleum for $1.6 billion, and sold Duvernay Oil to Shell for $5.9 billion, making shareholders scads of money along the way.
Those two companies were huge successes. What he has done this time around at Tourmaline is a bit harder to wrap one’s head around. From a standing start in 2008, he will have turned Tourmaline into the second-largest natural gas producer in the entire Western Canadian Sedimentary Basin by 2016.
With Tourmaline, Rose and his team (the same group from Duvernay Oil) have focused on the Deep Basin in Alberta. In just seven years, Tourmaline has assembled the largest land position (1.69 million acres), delineated the largest drilling inventory (8,833 locations) and become the single largest producer in the region.
The wells that Tourmaline is drilling into the Deep Basin are absolute monsters. In any list of the 10 best Alberta natural gas wells drilled each month, you can expect to find Tourmaline holding the majority of the spots.
Like all the great entrepreneurs who repeatedly create value for shareholders, Rose has done it by focusing on low-cost assets and keeping a pristine balance sheet. It doesn’t hurt that his reputation keeps Tourmaline’s share price at a premium valuation, offering all kinds of opportunities to use those shares to make lucrative acquisitions.
The biggest challenge for Rose—other than stubbornly low gas prices—is that Tourmaline got so big, so fast, that very few companies have the firepower to acquire it. That complicates the usual Mike Rose exit strategy. The best hope on that front for Tourmaline would be a West Coast LNG player needing to lock down significant feedstock. That might mean shareholders will be forced to enjoy this ride for quite a while longer.
Seven Generations Energy
Seven Generations CEO Pat Carlson
While you don’t see it said all that often, there is a very real possibility that natural gas prices may never recover to a price that many companies have long been waiting for. Sure, as a commodity you know that natural gas prices are going to always bounce around somewhat. The reality is that there is a huge amount of natural gas that has been unlocked in North America. More importantly, companies are getting better and better at getting that gas out of the ground each and every month.
Seven Generations is a rare natural gas producer that has not lost momentum despite the brutally low gas prices in recent years. The company’s liquids-rich Montney gas play has allowed it to double production in 2016 from 2015 levels, and nearly triple what the company produced on average in 2014.
Despite this success, Seven Generations CEO Pat Carlson is not willing to sit on his hands and hope that higher prices will come. Instead, he is looking to push forward with new initiatives that could include producing plastics or electricity. There is certainly significant risk involved in heading down this road, but the risk-taking gene is what has driven many independent producers to the successes they have achieved.
Besides, it might be about time that this industry became less a passive price-taker for its production and instead took the bull by the horns and gained more control of its destiny. Using low cost natural gas production as a competitive advantage in a vertically integrated business would be a tremendous opportunity.
As another company operating from a position of strength, Seven Generations just paid $1.9 billion for 155 net sections of very complementary Kakwa-Montney land from Paramount Resources.
Painted Pony Petroleum
Painted Pony CEO Patrick Ward
In this business, timing is everything. In July 2014, Painted Pony’s timing couldn’t have been better as it unloaded all of its remaining oil assets for $100 million right at the peak of the market. That cash gave Painted Pony a completely clean balance sheet with which to navigate the past couple of tough years.
Painted Pony is another young entrepreneurial company that has done some eye-popping things in a very short period. From 2008 through 2017, Painted Pony is expected to grow production by 5,945 percent. That’s quite a contrast from oil and gas majors that have struggled to grow production at all.
Like others on this list, it is the Montney natural gas that is driving Painted Pony. It has assembled a massive piece of prime real estate in the northeast B.C. Montney. We are talking about 217 net sections of land—139,049 net acres—surrounded by logical Painted Pony suitors and LNG players Petronas and Shell.
Having the foresight to lock down this terrific acreage was part one of this success story. Step two is becoming very, very good at getting hydrocarbons out of the stacked formations that are found on the property. As recently as 2014, Painted Pony was seeing initial production in the first 30 days of 5.5 Mcf/d, and exit production rates after one year for these wells have been coming in at 2.6 Mcf/d. The most recent generation of wells have seen those numbers increase to 9 Mcf/d and 6 Mcf/d, respectively.
At recent strip pricing, Painted Pony believes it can generate IRRs of 136 percent. Eventually, Painted Pony’s assets are going to make the company an acquisition target for one of the world’s largest oil and gas companies. One can only imagine, given its historical rate of growth, how much Painted Pony might be producing by the time that happens.
Raging River Exploration
Raging River CEO Neil Roszell
If you wanted a template for the perfect junior oil producer, it would be hard to do better than Raging River Exploration. To be a truly exceptional company, there are three key elements the company must have: Great assets; a rock-solid balance sheet; and, most importantly, a proven management team. Raging River has all three and then some.
Raging River’s CEO, Neil Roszell, is a serial entrepreneur. Creating value for shareholders seems to be in his DNA. That value creation can also be tied to the fact that Roszell is a significant shareholder in the companies that he builds. If you want results, you need to have the proper incentives.
Prior to forming Raging River, Roszell built and sold Wild River Resources, which was focused on the Shaunavon formation in Saskatchewan, to Crescent Point Energy. He must have enjoyed the experience, as he did exactly the same thing with a second company called Wild Stream Exploration in the same play, to the same acquirer.
While some companies have disappeared and most companies are struggling, Raging River has stood up very well through this oil crash, both in its stock price and operationally. An argument could be made that the company will actually benefit from this oil crash over the long run given the acquisitions it has been able to make because of it. Raging River has been able to do this because it went into the crash with one of the best balance sheets in the industry. It’s almost as if Roszell was aware that the oil business is a cyclical one, and built a balance sheet to withstand it.
Another key for Raging River is that it remains focused exclusively on the Viking light oil play which is a perfect fit for a junior producer. The Viking’s shallow setting allows for low-cost drilling, fast payouts and top-tier economics. The company has 4,000 future drilling locations, which should keep it going for another 16 years with major upside coming from waterflooding.
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